Downsizing, budget cuts affect S.D. region

The wartime era of growing defense spending in San Diego County plateaued in fiscal 2013 and will likely retract slightly next year, according to a report released today by the San Diego Military Advisory Council.

In 2014, the military and defense industry will continue to be San Diego’s “most important economic driver,” but its impact may diminish in coming years with the cumulative effects of federal budget cuts and Defense Department downsizing, the study forecast.

San Diego fared better than many predicted, however, during the 2013 federal budget crises that culminated in March with across-the-board defense spending cuts under sequestration.

The region was buffered by the return of a second Navy aircraft carrier that pumped about $500 million into the economy, as well as money drawn from reserve accounts to cover critical military operations and maintenance during the funding shortfalls.

“After 9/11, we had about a decade of defense spending ramping up. We peaked in 2010, and now we are starting to see it come down,” said Lynn Reaser, chief economist at the Fermanian Business and Economic Institute of Point Loma Nazarene University, which produced the study for the military and defense support organization.

“San Diego, however, is probably better-positioned than most regions in terms of weathering the decline.”

The infusion of $24.6 billion in direct defense-related spending during fiscal 2013 — up from $24.2 billion the previous year — generated 17 percent of San Diego’s gross regional product, an estimated $32.2 billion.

It also created 302,000 jobs, about 22 percent of the county total, according to the Point Loma research.

Considering inflation, the 2013 numbers reflect a slight decrease compared with last year, according to the study.

The figures incorporate the value of military housing benefits, as well as other data revisions from previous years.

Next year, most categories of defense spending except veterans benefits are expected to decline slightly, resulting in a 1 percent dip in the gross regional product, as well as a decline in jobs tied directly or indirectly to the sector to 295,000.

San Diego has an edge against shrinking defense spending in the coming decade because of the pivot, or rebalance, of U.S. forces to the Pacific in the post-Iraq and Afghanistan war era; a greater reliance on rapid response forces the Marines and special operations units like the Navy SEALs provide, the emphasis on drone warfare, investments in cybersecurity and a concentration of vital air-training ranges in the Southwest.

The findings of the fifth-annual report were somewhat surprising in terms of the muted impact of national budget woes, but the overall trend is unfolding as expected, those involved in the study as well as independent local economists agreed.

“Primarily what you are seeing is the early results of this pivot to the Pacific. We have been saying all along that San Diego is in a pretty good position to minimize the effects of the budget cuts,” because of the plan to have 60 percent of naval forces in the Pacific by 2020, up from 50 percent, said Earl Wederbrook, president of the council.

But the budget pain may be more pronounced next year if sequestration continues, because military reserve accounts are tapped.

“Everybody was kind of holding their breath hoping that something would happen to resolve sequestration,” Wederbrook said. “They (military commanders) were doing what they were supposed to do, which is work with what they got.”

A political breakthrough now seems unlikely before the fiscal year begins Oct. 1, when the country may also face a federal government shutdown that would delay military paychecks that provide about 45 percent of defense dollars in San Diego.

As the debate over whether to cut end-strength or procurement unfolds in Washington, San Diego has strengths in both areas. About 139,000 active-duty troops and civilian defense workers reside in the county, a number expected to fall to 136,000 next year.

Even if deeper personnel cuts are approved, the region may be able to count on relatively more investment in weapons systems developed locally.

About $10.1 billion flowed into San Diego this year because of defense contracts. In the previous year, shipbuilding brought in the most procurement dollars, more than $2 billion, followed by aircraft and engineering.

The top three defense contractors in San Diego in 2012 were General Atomics, maker of the Predator and Reaper remotely piloted aircraft, at $2.4 billion in contracts; Northrop Grumman, which is developing the first carrier-launched unmanned aerial vehicle, at $1.5 billion; and shipbuilder General Dynamics NASSCO, which received $1.2 billion.

Base closures in other parts of the country may be the wild card that benefits San Diego, which already has the largest concentration of military personnel in the world and a veteran population of about 240,000, according to the latest U.S. Census numbers.

“In the past that has happened to us, where we ended up with higher concentrations of personnel in the region because they’ve closed bases elsewhere,” said Marney Cox, chief economist for the San Diego Association of Governments.

Still, San Diego also has lost bases, such as the Naval Training Center, which closed in 1997.

Overall, the San Diego economy remains volatile, Cox added.

“Whether it’s the military or the economy in general, things are a little unsettled,” he said. He noted the overall gain for the region last year of 25,000 jobs, better than the national average, fell to 15,000 or so this year, which was worse.

The local economy is continuing to grow overall, although at a slower pace, agreed Alan Gin, associate professor of economics at the University of San Diego.

His latest monthly index of economic indicators rose 0.7 percent in July, fueled by sharp gains in building permits, consumer confidence, and the outlook for the national economy, along with smaller moves in local stock prices and help-wanted advertising.

Gin expects the August index to show a 12th-straight month of economic growth for the county.

“Growth in other areas has offset some of the really major damage that the full sequester would have caused locally,” Gin said. “The cut in defense spending is not going to be the drag on the local economy that some people expected.”